Should the Federal Government Help the Oil & Gas Industry?

Not too long ago, the United States bailed out the automotive industry to the tune of $9.3 billion. The heads of the Treasury Department believed the assistance was well worth the effort because it enabled GM and Chrysler to remain in business. The bail-out also saved numerous businesses along the automotive supply chain that would have gone under had GM or Chrysler failed. With the recent downturn experienced by the petroleum companies, pundits in oil and gas industry cost engineering are saying that now might be a good time for the U.S. to help out a few oil companies before they suffer catastrophic hardships due to oil prices being so low for such a long time.

Business insiders and industry consultants say that an overload of government regulations and intrusion is making the recovery from the recent problems harder. In 2015, Goldman Sachs Group Inc. said that crude prices needed to stay lower to permit the oil market to find equilibrium amid a supply glut. Now that prices are steadily climbing, more experts involved in oil and gas reserves evaluation are discussing whether the federal government should step in and assist. A Treasury Department statement said the government’s intervention enabled the auto industry to “come roaring back” and at the same time helped the economy recover from financial crisis.

However, the circumstances behind the problems in the oil and gas industry are different from those that affected automotive corporations. Additionally, the petroleum companies do not want aid from the United States Government according to economist Ray Perryman, the president and CEO of The Perryman Group in Waco, Texas. He also said that the industry structure was different because auto manufacturing consists of a few large corporations and hundreds of thousands of jobs. Larger companies in the oil business have other interests, such as the profitable field of refining. Plus, the smaller companies have assets that could be absorbed by larger energy firms.

The petroleum industry is currently on the downside of its commercial cycle. When oil prices were high, companies spent money on exploration and production. Those loans left them vulnerable to their creditors. Now, investors are awaiting their returns, and restrictive covenants are clogging the process. Perryman also said that the oil industry does not need to be completely overhauled like the auto industry. However, a little government attention would help. Revising the bankruptcy laws could help some companies stay in business as would an increase in exportation. A softening of the industry’s expensive regulations and requirements could also stimulate growth.

Unfortunately, some companies will not endure the latest series of challenges faced by the petroleum industry. Other companies with cash reserves will benefit by merging or purchasing the leases and assets of failed companies. Perryman views this as an inevitable part of the recovery and a natural occurrence in capitalist economies. Apart from some lateral movement, Perryman believes that the industry will survive.

John Kilduff, a partner at investment management fund Again Capital, wrote an article for CNBC in January 2016 that set forth his ideas for a government bailout of the oil industry. He advocates taxing energy companies during periods of prosperity and using that money to assist when times are not so profitable. He also thinks some producers should be paid not to produce in the same way that some farmers are subsidized to leave their fields unplanted. Kilduff believes that enhanced unemployment benefits should be available for oilfield workers and that a federal agency should set up another Strategic Petroleum Reserve by purchasing wells that have been drilled but not completed.

The industry has already benefited from advances in exploration software and access to petroleum economics courses and have been credited with recent successful oil drilling ventures. This trend will certainly continue as new technologies become available.